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Basis Points (bps) Definition Example | InvestingAnswers What are Basis Points (bps)? A basis point is the smallest measure used in quoting yields on fixed income products Basis points also pertain to interest rates One basis point is equal to one one-hundredth of one percentage point (0 01%) Therefore, 100 basis points would be equivalent to 1%
Credit Spread Definition Example | InvestingAnswers What Does it Mean When Credit Spreads Widen (Tighten)? When credit spreads widen, there is a bigger difference between the yield for a risky, corporate bond and the yield of a comparable, riskless government bond That means that the price of risk has increased It is usually taken as a signal that there is more volatility in the bond markets, and or more unease about the economy and about
Yield Spread Definition Example | InvestingAnswers How Does Yield Spread Work? Let's assume that Bond X is yielding 5% and Bond Y is yielding 7% The yield spread is 2% Spreads are generally described in ' basis points,' which is abbreviated ' bps ' and pronounced 'beeps ' One percentage point is equal to 100 bps In the example above, a bond trader would say that the yield spread between the two bonds is '200 beeps ' Yield spreads help
Effective Duration Definition Example | InvestingAnswers How Does Effective Duration Work? The formula for effective duration is: Effective Duration = (P- - P+ ) [ (2)* (P0)* (Y+ - Y-)] Where: P 0 = the bond 's initial price per $100 of par value P - = the bond's price if its yield falls by x basis points P + = the bond's price if its yield rises by x basis points (Y + - Y -) = Change in yield in decimal For example, let's assume you purchase a
TED Spread Definition Example | InvestingAnswers Typically, the size of the spread is designated in basis points (bps, pronounced 'beeps') For example, if the T-bill rate is 5 10% and 3-month LIBOR is 5 50%, the TED spread is 40 bps Over long periods of time the TED spread fluctuates within a wide range, but historically it has roughly stayed within 10-50 bps (0 1% and 0 5%)
NAV -- Discount to Net Asset Value -- Definition Example How Does Discount to Net Asset Value (NAV) Work? Discount to NAV (and 'premium to NAV ') is most often used to describe the price per share of closed-end stock funds Closed-end funds are similar to open-end funds (commonly known as ' mutual funds ') except for a few key differences
Credit Default Swap -- Definition Example - InvestingAnswers How does a Credit Default Swap (CDS) work? In a credit default swap (CDS), two counterparties exchange the risk of default associated with a loan (e g a bond or other fixed-income security) for periodic income payments throughout the life of the loan In the event that the borrowing party (the issuer) does default, the insuring counterparty agrees to pay the lender (bondholder) the par value